How Egypt Got Russia’s Warships

Nobody cooks quite like the French, so it is no surprise that President Francois Hollande has come up with his own recipe to promote democracy in Egypt.

Step one: Sell advanced warships to the country’s military strongman, Abdel-Fattah el-Sissi. Regardless of how the recipe comes out, the deal is likely to leave a bad taste in the mouth of France’s NATO allies. But you can’t please everyone.

In late September, Hollande announced that Egypt plans to buy the two Mistral warships France had originally built for Russia. Egypt will pay 950 million euros (about $1 billion) for the pair of warships, with a “significant” amount of the financing coming from its ally Saudi Arabia. This is a slight discount from the 1.2 billion euros Russia had planned to pay. While other navies, including those of Canada and India, had expressed interest in the ships, Hollande said that Egypt was his “preferred buyer” due to its existing military cooperation with France and the Cairo government’s supposed steps toward democracy. I am sure he meant no offense to Ottawa and New Delhi, where democracy is actually practiced.

That is by no means the case in Cairo. Amnesty International harshly criticized France’s decision in light of what Amnesty has called Egypt’s “alarming” human rights abuses. After el-Sissi’s election last year, a crackdown on supporters of his predecessor, Mohammed Morsi, left thousands of Egyptians in prison and at least 1,400 of them dead. Yet Hollande has maintained that a closer French-Egyptian partnership has grown out of the “fight against terrorism” in the region.

In what was most likely a bid to help Hollande save face, on the day the sale became public el-Sissi announced that he had pardoned 100 prisoners, including two Al-Jazeera journalists. Well, three, if you count an Australian who had already been deported but was also pardoned. All three were charged, tried and convicted in Egypt’s counter-revolutionary legal system for reporting on the protests that followed the coup that deposed Morsi, an elected Islamist president. Of course, from the point of view of Egypt’s new (or, rather, newly returned old) ruling class, the reporting was patently false. El-Sissi was elected with 97 percent of the vote when he sought a mandate after the coup, so how could there have been protests?

It is a scenario that would have made any regime west of Pyongyang blush, but apparently it isn’t enough to prevent Hollande from claiming that selling amphibious assault ships to Egypt’s new rulers will promote democracy in the country. If nothing else, those ships should make an impression when they show up off the shores of Alexandria. It is reasonable to suspect this is one main reason Egypt wants them.

France had been seeking a new customer for the Mistrals for about a year, ever since Russia’s absorption of Crimea and aggression elsewhere in eastern Ukraine made it politically impossible to complete the sale to Putin. But Hollande was not willing to completely destroy his bridges to a past, and potential future, customer. Not only did he refund much of what Moscow had paid for the ships – to the tune of 949.7 million euros – he also compensated Putin for designing and building the helicopters that were supposed to be based aboard them. Helicopters, for the record, that Russia gets to keep after being compensated for building them.

But where will those helicopters be used? That turns out to be another interesting point about the sale to Egypt. Because the two Mistral ships were custom-built to Russian specifications, there are systems on those ships that require training, maintenance and support from… Russians. And France has already trained Russian naval crews in the warships’ operation. Since these Mistrals were supposed to have been only the first part of a larger purchase that would have eventually entailed Russia building additional vessels with French help, it is safe to assume that Russia has access to most of the technical information it needs in order to build its own copies. Any other missing information can be gleaned when the Egyptians bring their new ships to the Russians – who are already arms suppliers to Cairo – for their necessary oil changes and tuneups.

And though Hollande backed off, if slowly, from the planned Russian sale, in addition to compensating Russia, the French president reportedly agreed not to sell the ships to Poland, the Baltic nations on Russia’s borders or any other country that could “contravene Russia’s interests.” Ukrainians need not have applied – not that Kiev could have afforded the ships anyway, at least not without the kind of financial help that Egypt is getting from Saudi Arabia.

But observe that Poland and the Baltic countries of Latvia, Lithuania and Estonia are all, like France, members of NATO. Hollande agreed with Putin not to provide the ships to his own NATO allies, whom France is pledged to defend against any external attack. And from what direction would any such attack plausibly occur? Putin’s Moscow.

Strategically, it is hard to see what use el-Sissi can make of the ships in his own neighborhood, unless radical insurgents manage to capture territory in Sinai and threaten the Suez Canal. But if that happens, the Cairo regime itself will be in danger – and the ships may well fall into the hands of new commanders. They might decide to deploy them sometime in the future to intervene in another conflict between Israel and Palestinians in Gaza, or directly against Israel itself. Or the ships could eventually make their way toward Lebanon-based Hezbollah, or even farther north to Syria, where the Russians conveniently have a naval base at Tartus.

Or Egypt might just eventually sell or “lease” the ships to Russia directly, perhaps in exchange for other weaponry more useful to a military-backed dictatorship situated in a desert. Weaponry like the $5 billion worth of Rafale fighter jets that Egypt agreed earlier this year to buy from France, for example. Egypt thus became the first foreign buyer of the French jet. Hollande, as Putin can attest, is committed to keeping his customers satisfied.

There were a lot of parties interested in the two Mistrals. France and its European neighbors might have decided to keep them to counter the growing Russian presence in their backyard, but that would have required a policy correction to actually spend serious money on their continent’s own defense. They might have been able to sell the craft to Saudi Arabia directly, where the Mistrals could have been put to good use defending freedom of navigation in the Persian Gulf. Or to Malaysia or Indonesia, both of which have responsibilities to defend the vital Malacca Strait against pirates and other threats. Or India, which has already been targeted by seaborne terrorists operating out of Pakistan and expressed interest in purchasing the warships.

But non! Hollande decided that the best use of these ships in defense of democracy was to sell them to Egypt’s self-appointed president, thus depositing them in the hands of an unstable regime in one of the most unstable corners of the world, not to mention the one that is the most immediate problem for Europe.

Hollande’s recipe will surely be a hit in Moscow and Cairo. I expect it will leave a bad taste in the mouths of many of France’s official allies.

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.